Money Matters

Partner in crime

By Ihtasham Ul Haque
Mon, 06, 17


For the first time, after the completion of its three year funding programme, the International Monetary Fund (IMF), has admitted that fiscal consolidation has slowed down and that the macroeconomic stability gains made during 2013-16 have begun to erode, which could pose risks to the economic outlook.

Why did the IMF and its executive board remain in denial mode for so long and gave waiver after waiver during their 12 reviews of the Pakistani economy? Why have they chosen this particular time to warn the government by painting such a gloomy picture of the country’s economy?

All this happened recently, when the IMF Executive Board concluded its Article IV consultations with Pakistan. Allegedly, their criticism serves a dual purpose: it warns other multilateral and bilateral creditors to do their homework before offering any fresh loans to Pakistan; and secondly, it reminds the rulers that they cannot survive without looking towards the Washington-based lending agency for its support.

The timing of concluding the Article IV consultations, accompanied with the latest, and bleak assessment of the Pakistani economy, is being called very important, as the incumbent prime minister is fighting a war for his political survival in the Supreme Court of Pakistan. The assessment is like a bombshell and contradicts what the IMF has said in its previous assessments over the last three years. If all is not well on the economic front, why were they praising the economy as being on the path of greater recovery after many years?

Just in one go the IMF has made a mockery of all its previous reports and findings, in the last three years, by challenging the macroeconomic stability gains due to unprecedented $30 billion trade deficit, widening of current account deficit getting close to $9 billion, the balance of payments turning 3 percent of GDP, and declining of $3 billion foreign exchange reserves during 2016-17.

The fund officials expressed their apprehension about the country’s ability to service their burgeoning external debt and the payment of profit obligations associated with the inflow of $55 billion under China-Pakistan Economic Corridor (CPEC).

A million dollar question is why would the IMF release this upsetting picture of the state of the economy at this point in time? All of a sudden the IMF sees flaws in the policy planning due to which the process of implementation of policies has weakened and that the 2017-18 budget would require additional revenue measures to improve revenue performance that had been very dismal over the years.

Those who are in the know of the things, including independent economists, maintain a fresh warning by the IMF speaks volumes about its future planning and assessment to offer any new loan facility to Pakistan.

Now, when the new Trump administration plans to put new restrictions on Pakistan for allegedly supporting terrorism, the IMF’s latest assessment of the economy sufficiently tells Islamabad that more conditions, including a possible denuclearisation would be there if the country seek new foreign loans, both from the IMF and other International Financial Institutions (IFIs). This is said to be an option for IMF if the current $80 billion external debt reaches $100 billion during the next two year time.

One of the impediments that are restricting exports, according to the IMF is the current exchange rate which it believes, needed to be depreciated to Rs113.5 against dollar as it had been urging during its twelve reviews. At that time the government agreed with IMF to reset the exchange rate but did not do that to ostensibly avoid any political backlash as it would have been seen as a weakening of the economy. But then it is also said that failure to generate sufficient exports will create serious problems to meet external obligations, including those arising out of the foreign funded investment related to CPEC.

Allowing greater exchange rate flexibility has been urged all along by the IMF during the three-year $6.2 billion Extended Fund Facility (EFF) bailout package. However, the fund officials, it is said, did not exert pressure by linking their assistance to the issue due to US government that did not want any upheaval in the region.

The situation could worsen in the region if the Trump administration withdraws non NATO ally status for Pakistan and further reduces its assistance as is being proposed by some US senators and congressmen. Under these circumstances, early warning by the IMF simply conveys the message to the government: “do as we say or face the consequences on both the political and economic fronts.”

Now when the country seems to be in election mode, the IMF suggesting the government to go for additional Rs300 billion taxes in addition to such measures announced in 2017-18 budget, perhaps cannot be accepted by the rulers.

This abundantly endorses the point of view of the independent economists and television commentators that increasing tax-to-GDP ratio to 17 percent is a far cry and that this should not be expected from the political governments which believe in managing their financial affairs by recklessly borrowing both from internal and external resources.

In that backdrop it is also said that the government is highly unlikely to accept the IMF’s proposal to do away with heavy borrowing from the central bank, which went as high as over Rs1 trillion during the outgoing financial year. Since there was no oversight available due to expiry of IMF programme in October last year, the government opted for deficit financing by printing notes in addition to borrowing from commercial banks. This borrowing including $3 billion to ensure that the foreign exchange reserves remain at a certain level, enough for five weeks of import, which is fast becoming a difficult proposition considering persistent decline in exports as well as home remittances by overseas Pakistanis.

For the first time, the IMF also differed with the government about the size of the country’s total debt and placed it at over Rs21 trillion and not Rs18.2 trillion. Besides, the fund officials projected that the government’s external financing requirements during 2017-18 would be close to $17 billion, seeing $11 billion current account deficit and $6 billion debt repayments.

How would the government arrange this financing is another intriguing question? It may seek more external borrowing, including increased foreign direct investment (FDI), but the gap would still be to the tune of $6 billion. Many believe that the finance minister would continue to seek more and more extensive loans from the central bank and use this money to purchase dollars from the open market by ensuring that there is no serious scarcity of dollars in the open market. The objective is to get away with the upcoming election year by indulging in gimmicks and by opting for incredible local and external loans, the end result of which would only be the piling of debt which is already getting unmanageable.

Government debt has reached 66.6 percent of the GDP. It is now a fact about which even the IMF is not mincing words, and for the first time has refuted the finance minister, who told the National Assembly last week that the government debt stood at 59.3 percent of the GDP.

The Fiscal Responsibility and Debt Limitation Act of 2005 restrict this debt to GDP ratio at 60 percent. The fund officials knew that this ratio was increasing, but still they extended waiver after wavier because of which independent economists alleged that IMF was “partner in crime” and that it deliberately avoided taking notice of the serious economic issues. 

Nevertheless, the IMF estimated 6 percent GDP growth rate over the medium term due to CPEC related investment compared to 5.3 percent of the outgoing financial year. Here once again the IMF is being accused of taking refuge under CPEC as it is conveniently forgetting its similar higher projection of GDP growth rate in the past without substantiating it with some argument.

How can Pakistan achieve higher GDP growth rate without opting for growth supporting structural reforms in the basic structure of the economy? There are also questions whether the government opted for policy reforms particularly in the revenue and energy sectors, and if the situation is so, why has revenue continued to show roughly Rs200 billion annual shortfall; and why the circular debt, which was removed in 2013 by making payments amounting to Rs480 billion once again surfaced to Rs400 billion.

Pakistan’s GDP growth, which averaged seven percent and as such remained better than India, Bangladesh and many countries during 1960-1990, struggled to be in vicinity of three percent or less than that during the five years of the Pakistan Peoples’ Party rule and about two years of the PML-N tenure. No doubt this GDP growth rate later went up to four percent and 4.5 percent and now was poised for five percent plus in 2017-18.

The yardstick to measure GDP growth rate is significantly linked to job creation and poverty alleviation besides improvements in other key sectors of the economy. Have the PPP and now PML-N government created enough jobs and removed abject poverty to ensure better growth rate? Did the planners take enough strong policy measures to manage sustained GDP growth rate?

It is generally asked that if the growth rate has improved, why it was not creating hundreds of jobs for the educated youth and skilled workers. They also asked why more than half of the country’s population was still living below the poverty line, sustaining on only two dollars a day. Despite being involved in exaggerating figures, annual economic surveys have been conceding that there has not been enough job creation or poverty alleviation, but still the growth rate has been picking up, which unfortunately does not corroborateiiiiiiiwith the facts on the ground.

Who does not know that without enhancing the savings and investment rates there cannot be any better GDP growth rate and that without significantly investing in the education and health sectors the objective of real progress and development will remain a distant dream.

Just two percent allocation for education cannot contribute for having some impressive growth rate in the country. After years of restrictions, the IMF agreed to help concentrate on growth over so-called fiscal stabilisation.              

Going forward, home grown policies and not World Bank/IMF prescribed polices would do the trick to ensure sustained and robust growth rate. Likewise, the process of second generation reforms will have to be completed to increase revenues and exports, thus creating enough resources to be spent on the public for their well- being. All this demands good governance, and the will to tackle economic issues upfront without compromising on principles.

Will the current government do so? Can a future government do that? The Planning Commission, which has been used and abused by government after government, needs to be reactivated to propose adequate measures through its annual assessment of the economy. The job it has been said could be accomplished by the minister for development Ahsan Iqbal, provided he is allowed by the finance minister to work independently.

The writer is a senior journalist based in Islamabad